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July 22, 2002

Less "Static," Please

By

Say you own a grocery store. You notice that six-packs of a particular soft drink are selling briskly at $2 each, which brings you a modest profit. A friend says you should sell them at $4-which, he suggests, would double your profit. Would you do it?

Probably not. You don't need an MBA from Wharton to realize that dramatically hiking your price would cause many customers to shop elsewhere. Sure, you'd be making more money per six-pack, but you wouldn't sell nearly as many.

Just common sense, isn't it? So why does Congress act like the store owner's friend every time it votes to raise spending, increase taxes or assemble a budget?

Indeed, some lawmakers are fighting a proposal that would require them to take real-world considerations into account. They prefer to keep "scoring" each bill-estimating how it will affect the economy and the amount of taxes they take in-with the "static" model used by the store owner's friend. If, say, a 5 percent tax on something brings in $50 million, they assume a 10 percent tax will fetch $100 million.

Not surprisingly, this approach has caused lawmakers to come up with some wildly inaccurate assumptions over the years. Consider what happened with President Kennedy's tax cut. Many lawmakers were sure that, with the top marginal tax rate being slashed from 91 percent to 70 percent, tax revenues would plunge. Instead, the cut spurred economic growth. Between 1961 and 1968, tax revenues rose by one-third.

The same thing happened when President Reagan cut taxes in the early 1980s. Many lawmakers predicted financial ruin as the top rate plummeted from 70 percent to 28 percent. Again, they were wrong. Once the cuts were phased in, tax revenues soared. The amount of money the federal government was taking in through personal income taxes had increased 28 percent (adjusted for inflation) by 1989.

Yet no matter how many times a "static" analysis is disproved, Congress keeps doing business in the same wrong-headed way. And it can have serious implications. Look at how Congress handled repeal of the estate (or "death") tax last year. During the period the legislation was being debated, static estimates of how much a repeal would "cost" jumped from $186 billion to $306 billion between 2002 through 2011. Alarmed, Congress elected to phase in the repeal slowly, until the tax is gone in 2010 … and then reinstate it in 2011 at its original levels.

If experience is any guide, though, death-tax repeal won't "cost" nearly that much. But by the time most lawmakers realize that, another opportunity to boost economic growth will have been missed.

Can you imagine any private business acting this way? Of course not. That's why it's time Congress switched to a method many business owners use-"dynamic scoring"-which assumes that if you change the way you do business, customers will react in relatively predictable ways. Before they've hiked a price or changed a product, most companies have a pretty good idea of how many customers they'll gain or lose.

Would "dynamic scoring" always give lawmakers perfect estimates? No, but it surely would get much closer to the true cost than "static scoring" does. If doubts remain, put it to the test: Have Congress produce "static" and "dynamic" scores of various pieces of legislation for a few years and see which prove more accurate.

Meanwhile, certain lawmakers are assuring us that we can't make the Bush tax cut permanent. (Like the death-tax repeal, it's gone in 2011.) Why? "Static" estimates show it will cost too much. Haven't we been here before?

Edwin J. Feulner, Ph.D. is president of The Heritage Foundation, a Washington-based public policy research institute.

Distributed nationally on the Knight-Ridder Tribune wire

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